Thorsrockday Emerging Markets

I wrote this big long story, but I figure nobody wants to read all that, so to summarize, the economic cycles repeat themselves throughout history. And we have something we call “the market” which does not necessarily reflect economic cycles. I wrote a tribal anecdote about that, with Chiefs and Indians.

We seem to be nearing the top of a market cycle right now. And at the bottom of economic cycles in many parts of the world (I hope we’re at the bottom in the US, but I’m afraid that may not be the case). South Africa has a 24% unemployment rate. Jobs are at a premium in Europe, so companies like American Express can write their own ticket on where they want to have their central headquarters (AMEX is moving out of Spain and into the UK, for instance). Singapore offers the lowest tax rate of all if you move to Sing: 0% for years. The number of years is negotiable.

No wonder jobs moved away from the US. But that’s not emerging markets. The emerging markets are offering something they have, so inexpensively that nobody can turn it down. For example, Indonesia offers housing, 10K buys a 1600 sq. ft. place, and it’s an hour commute to Singapore or Johor Bahru. (In Singapore you’d pay at least 2 Million and maybe 4 Million for 1600 sq. ft.).

So the emerging markets are taking from the developed markets, which makes their percentages look great. And, because companies are moving to countries with low tax rates (the “emerging markets”) their reports show huge profits in these areas (like Google’s profits were reported from the Canaan Islands, and you and I both know GOOG is in Palo Alto).

So when an emerging market shows a downtrend, what does that mean? It means they don’t have what we (the developed economies) want or need. What does that mean? We (the developed economies) stop buying from the emerging markets, and we stop sending profits there.

The cause of the 2008 crash was not the banks, although it’s nice to point fingers there. It was building permits. New permits numbers dropped like a stone a couple months before the big 666 dive. People stopped buying. That’s what caused the crash.

Now look at Brazil. People are stopping buying. The EWZ is turning down. I have a chart here which overlays the Dow and the EWZ, which is interesting. When EWZ starts to decline, the DOW follows.

I’m not saying that will happen this time, but when people stop buying, the market falls. And it may be that we’re not buying as much from emerging markets. See if you can find evidence where the developed economies are not buying as much from the emerging markets.

(I was going to talk about inflation in emerging markets, but I’ve taken enough space already).

I am no longer as full of bull as I was before. When people stop buying, the market falls. Looking at RTH, and retailers reports, US consumers seem to be buying, and the savings rate is going down again, so it's as a result of spending their savings. Not good signs, because ultimately, that buying stops.

Here's the chart: